UK Construction Industry Growth Accelerates

Between September and October 2021, the IHS Markit/CIPS UK Construction Purchasing Managers’ Index (CPMI) rose from 52.6 to 54.6. A reading above 50 indicates the industry is growing. The index is calculated from a survey of construction managers around the country. This means it utilises information currently only available to firms and is generally indicative of the hard data released later, making it a uniquely reliable indication of growth. In the same period, the all-sector PMI has risen to 57.5 from 54.7, showing that while construction is growing, it is not growing as fast as other sectors.

The observed growth in the construction industry has surprised a multitude of analysts and industry experts. For example, a Reuters poll of economists predicted a decline in CPMI down to 52 by October 2021. They attributed this expected decline to the plethora of issues facing construction firms, including the difficulty with finding workers, shortages of materials, rising fuel and energy prices, and high inflation. 73% of the panel surveyed for the index, reported rising costs which may pose an issue for firms who have underbid to win contracts.

However, it appears that the construction industry is recovering quicker than initially predicted. One issue that has seen definite improvement is in transport difficulties. At its worst in June 2021, 77% of firms reported longer delivery times which cause delays in construction and waste time on site. As of November 2021, the number of firms reporting longer delivery times has decreased to 54%, down 9% from September 2021. The rapid resolution of logistical issues for a 10% of survey participants in a month suggests that there is more easy growth potential in the construction market, as the existing issues can be remedied rapidly. With the publication of the new data IHS Markit economics director Tim Moore said, “The worst phase of the supply crunch may have passed.” However, the index is still only 10 points south of the 2021 peak in June (which was a 24 year high of 66.3), suggesting that despite improvements, the supply issues are far from fixed.

Construction firms stated that demand has been strong, especially in housing. This is supported by the latest statistics from HMRC which show a 59.7% rise in residential transactions between August and September, during what should be a seasonal market contraction and a 67.3% rise on September 2020. This strong demand is a factor in the CPMI but as the index looks at supply purchases for construction it is mostly impacted by expectations for future demand.

Improvement was not limited to housing. Though housing overtook commercial to be the best performing category, commercial construction is still strong with an index of 55.2, about 2 points below housing. The weakest performing segment is civil engineering, a drag reflected in European indices.

The index is also created for individual market segments, those being residential, commercial, and civil construction. Though housing overtook commercial to be the best performing category, commercial construction is also strong with an index of 55.2, only approximately 0.2 points below housing. The weakest performing segment is civil engineering, a drag reflected in European indices, though modest growth is still indicated in the UK.

The rise in UK CPMI is mirrored in the Eurozone, for which reports were also released on the 5th November 2021. In the month to October 2021, the Eurozone CPMI rose 1.2 points, up to 51.2, indicating a growing industry. However, unlike in the UK, Europe did not experience a major boom in the summer of 2021. The major European power Germany reports a contracting 47.7, while Italy has an impressive CPMI index of 58.6. The Eurozone faces similar issues with supply chains, logistics and rising costs. The Eurozone also shares the UK’s struggle regarding the civil engineering index, which continued a 27-month decline. It appears that across the UK and Eurozone commercial and housing construction has begun recovering the quickest, and interestingly employment in construction has also risen, particularly in Italy.

The prospects of the UK construction industry currently look much improved. The IHS Markit / CIPS report marks the “degree of optimism improved slightly”, as 52% of firms project an increase in output in the coming year. However, this optimism is not without caution. Staff shortages, rising costs, volatile prices and the possibility of further social distancing or lockdown restrictions bring uncertainty and threaten the possibility of growth. Nevertheless, the UK construction industry is experiencing accelerating growth, even during the difficult and ongoing supply chain issues, rising inflation and staff shortages. To experience growth suggests the industry is in a strong position and is on track to recover well from the effects of COVID-19.

By James Miller

Sector Head: Charlotte Snell